ClearPoint Neuro, Inc. (CLPT) FY 2022 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that are based upon current expectations and involve risks, assumptions and uncertainties. You should review the “Risk Factors” section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.

Overview

We are a commercial-stage medical device company that develops and commercializes innovative platforms for performing minimally invasive surgical procedures in the brain. We have deployed significant resources to fund our efforts to develop the foundational capabilities for enabling MRI-guided interventions, building an intellectual property portfolio, and identifying and building out commercial applications for the technologies developed by our company. Beginning in 2021, our efforts expanded beyond the MRI suite to encompass development and commercialization of new neurosurgical device products for the operating room, as well as clinical and pre-clinical consulting services for pharmaceutical and biotech companies, academic institutions, and contract research organizations.

Since 2020, we have evolved to become a company comprised of two parts. The first foundational part is a medical device company providing medical devices for neurosurgery applications. The second part is focused on partnerships in the drug and delivery space. Currently, we have more than 50 partners who are pharmaceutical/biotech companies, academic institutions, and contract research organizations, who are evaluating or using our products and services in trials to inject gene and cell therapies directly into the brain.

Our ClearPoint system is in commercial use in the U.S., the EU, and the United Kingdom. The primary applications for the ClearPoint system are to target and guide the insertion of deep brain stimulation electrodes, biopsy needles, and laser catheters, as well as the infusion of pharmaceuticals into the brain. The ClearPoint system was originally designed for use in an MRI setting. In 2021, we launched the SmartFrame Array Neuro Navigation System and Software, which allows for operating room placement of the ClearPoint system.

2022 Developments

•We commenced the limited market commercialization of the ClearPoint Prism Neuro Laser Therapy System. The laser system was developed by CLS, and is indicated for use to necrotize or coagulate soft tissue through interstitial irradiation or thermal therapy under 3.0T magnetic resonance imaging (MRI) guidance. We have exclusive global rights to commercialize the CLS magnetic resonance (MR) guided laser interstitial thermal therapy (MRgLITT) system for neuro applications.

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•Our customer PTC Therapeutics’ gene therapy treatment Upstaza™ was granted full marketing authorization by the European Commission which is the first approved disease-modifying treatment for AADC deficiency and the first marketed gene therapy approved for direct infusion into the brain, using the ClearPoint SmartFlow Cannula.

•We received FDA clearance for version 2.1 of our ClearPoint Neuro Navigation software, which is intended to provide sterotactic guidance for the placement and operation of instruments or devices during planning and operation of neurological procedures within the MRI environment and in conjunction with MR imaging.

•We received FDA clearance for the ClearPoint Maestro Brain Model, which is intended for automatic labeling, visualization, volumetric and share quantification of segmentable brain structures from a set of MRI images.

•We entered into a lease agreement to lease an approximately 19,462 square foot industrial building in Carlsbad, California to use as an office and manufacturing facility. The lease term will commence on June 1, 2023 and end on May 31, 2033.

Factors Which May Influence Future Results of Operations

The following is a description of factors which may influence our future results of operations, and that we believe are important to an understanding of our business and results of operations.

Macroeconomic Trends

We continue to monitor the impact of various macroeconomic trends, such as global economic and supply chain disruptions, geopolitical instability, labor shortages and inflationary conditions, and the continuing impacts of the COVID-19 pandemic. Changes in domestic and global economic conditions, supply chain disruptions, labor shortages, as well as other stimulus and spending programs, have led to higher inflation, which is likely to lead to increased costs and may cause changes in fiscal and monetary policy. Impacts from inflationary pressures, such as increasing costs for research and development of our products, administrative and other costs of doing business, and our availability to access capital markets and other sources of funding in the future could adversely affect our business, financial condition and results of operations. Additionally, these trends could adversely affect our customers, which could impact their willingness to spend on our products and services. The rapid development and fluidity of these situations precludes any prediction as to the ultimate impact they will have on our business, financial condition, results of operation and cash flows, which will depend largely on future developments.

Revenues

In 2010, we received 510(k) clearance from the FDA to market our ClearPoint system in the U.S. for general neurosurgical procedures; in February 2011 and May 2018, we also obtained CE marking for our ClearPoint system and SmartFlow cannula, respectively; and in June 2020 we obtained CE marking for version 2.0 of our ClearPoint software and our Inflexion head fixation frame. In January 2021, we received 510(k) clearance for the SmartFrame Array Neuro Navigation System. In September 2022, the ClearPoint Prism Neuro Laser Therapy System, for which we have exclusive global right to commercialize, received 510(k) clearance through our Swedish partner, CLS. The Prism laser represents the first therapy product we will commercialize. Future revenue from sales of our ClearPoint platform products and services is difficult to predict and may not be sufficient to offset our continuing research and development expenses and our increasing selling, general and administrative expenses.

Generating recurring revenue from the sale of products is an important part of our business model for our ClearPoint system. Our product revenue was approximately $12.8 million and $11.9 million for the years ended December 31, 2022 and 2021, respectively, and was almost entirely related to our ClearPoint system. Our service revenue was approximately $7.8 million and $4.4 million for the years ended December 31, 2022 and 2021, respectively, of which 70% and 78%, respectively, related to the biologics and drug delivery service line.

Our revenue recognition policies are more fully described in Note 2 to the Consolidated Financial Statements elsewhere in this Annual Report.

Underlying the revenue from sales of products and services to our biologics and drug delivery customers is the number of direct customers and end users of our products and/or services (“Partners”). Our Partners consist of pharmaceutical and biotech companies, academic institutions, or customer-sponsored contract research organizations that

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are developing methods to deliver a wide variety of molecules, genes or proteins to targeted brain tissue or structures that would need to bypass the blood-brain barrier for the treatment of a variety of disorders. This is a novel area in which commercialization must be preceded by FDA-mandated clinical trials, which are expensive and time consuming to conduct, and for which commercial success is uncertain, pending, in part, on the outcome of those trials. While our revenue from sales of products and services to our biologics and drug delivery customers is indicative of growth, the number of Partner relationships is also of importance as we recognize the possibility that some Partners’ research will reach commercial success, and others may not. To the extent our Partners achieve commercial success, our expectation is that we will share in such success through our Partners’ use of our products and services in their delivery of therapies. At December 31, 2022, we had more than 50 Partners, as compared with approximately 40 Partners as of the same date in 2021.

Cost of Revenue

Cost of revenue includes the direct costs associated with the assembly and purchase of components for functional neurosurgery navigation products, biologics and drug delivery products, non-neurosurgery therapy products, and ClearPoint capital equipment that we have sold, and for which we have recognized revenue in accordance with our revenue recognition policy, as well as labor hours for the cost of providing consulting, and service revenue. Cost of revenue also includes the allocation of manufacturing overhead costs and depreciation of loaned systems installed under our ClearPoint placement program, as well as provisions for obsolete, impaired, or excess inventory.

Research and Development Costs

Our research and development costs consist primarily of costs associated with the conceptualization, design, testing, and prototyping of our ClearPoint system products and enhancements. Such costs include salaries, travel, and benefits for research and development personnel, including related share-based compensation; materials and laboratory supplies in research and development activities; outside consultant costs; and licensing costs related to technology not yet commercialized. We anticipate that, over time, our research and development costs may increase as we: (i) continue to develop enhancements to our ClearPoint system and SmartFlow cannula; and (ii) seek to expand the application of our technological platforms. From our inception through December 31, 2022, we have incurred approximately $81 million in research and development expenses.

Product development timelines, likelihood of success, and total costs can vary widely by product candidate. There are also risks inherent in the regulatory clearance and approval process. At this time, we are unable to estimate with any certainty the costs that we will incur in our efforts to expand the application of our technological platforms.

Sales and Marketing, and General and Administrative Expenses

Our sales and marketing, and general and administrative expenses consist primarily of salaries, incentive-based compensation, travel and benefits, including related share-based compensation; marketing costs; professional fees, including fees for outside attorneys and outside accountants; occupancy costs; insurance; and other general and administrative expenses, which include, but are not limited to, corporate licenses, director fees, hiring costs, taxes, postage, office supplies, information technology and meeting costs. Our sales and marketing expenses are expected to increase due to costs associated with the commercialization of our ClearPoint system and the increased headcount necessary to support growth in operations.

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as the reported revenues and expenses during the reporting periods. The accounting estimates that require our most significant, difficult and subjective judgments are discussed below. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions.

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While our significant accounting policies are more fully described in Note 2 to our Consolidated Financial Statements included elsewhere in this Annual Report, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results.

Revenue Recognition. Our revenue is comprised primarily of: (1) product revenue resulting from the sale of functional neurosurgery, navigation, therapy, and biologics and drug delivery disposable products; (2) product revenue resulting from the sale of ClearPoint capital equipment and software; (3) revenue resulting from the service, installation, training, and shipping related to ClearPoint capital equipment and software; (4) consultation revenue and clinical case support revenue in connection with customer-sponsored pre-clinical and clinical trials; and (5) license revenue for the granting of a license to develop and commercialize our SmartFlow Cannula devices with Partners' proprietary biologics as a combination product. We recognize revenue when control of our products and services are transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products and services, in a process that involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. We evaluate each product or service promised in a contract to determine whether it represents a distinct performance obligation. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. When a contract calls for the satisfaction of multiple performance obligations for a single contract price, we typically allocate the contract price among the performance obligations based on the relative stand-alone prices for each such performance obligation customarily charged by us. We consider a performance obligation satisfied once we have transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. Product revenue is generally recognized at a point in time, generally upon shipment, however, may be upon delivery based on the contractual terms of the contract. Service revenue is generally recognized over time as the services are delivered to the customer based on the extent of progress towards completion of the performance obligation. The selection of the method used to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control.

Inventory. Inventory is carried at the lower of cost (first-in, first-out method) or net realizable value. Items in inventory relate predominantly to our functional neurosurgical products, drug delivery and biologic products, therapy products and ClearPoint capital equipment. Software license inventory related to ClearPoint systems undergoing on-site customer evaluation is included in inventory in the accompanying consolidated balance sheets. All other software license inventory is classified as a non-current asset. We periodically review our inventory for excess and obsolete items and provide a reserve upon giving consideration to factors such as its physical condition, sales patterns, and expected future demand in order to estimate the amount necessary to write down any slow moving, obsolete, or damaged inventory. These estimates could vary from actual amounts based upon future economic conditions, customer inventory levels, or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.

Share-Based Compensation. We account for compensation for all arrangements under which employees and others receive shares of stock or other equity instruments (including options and warrants) based on fair value. The fair value of each award is estimated as of the grant date and amortized as compensation expense over the requisite vesting period. The fair values of our share-based awards are estimated on the grant dates using the Black-Scholes valuation model. This valuation model requires the input of highly subjective assumptions, including the expected stock volatility, estimated award terms and risk-free interest rates for the expected terms. To estimate the expected terms, we utilize the simplified method for “plain vanilla” options discussed in the SEC’s Staff Accounting Bulletin 107, or SAB 107. We believe that all factors listed within SAB 107 as prerequisites for utilizing the simplified method apply to us and to our share-based compensation arrangements. We intend to utilize the simplified method for the foreseeable future until more detailed information about exercise behavior becomes available. Historically, we have based our estimate of expected volatility on the average of our own historical volatility and the historical volatilities of publicly traded companies we deem similar to us because of a lack of our own relevant historical volatility data. In 2022, we refined this methodology to include only the historical volatility of our own common stock given that trading volumes have increased and we believe that our own historical data is representative of future expected volatility and a better estimate of fair value. The impact of this change is not material to the financial statements. We utilize risk-free interest rates based on a zero-coupon U.S. treasury instrument, the term of which is consistent with the expected term of the share-based award. We have not paid, and do not anticipate paying, cash dividends on shares of our common stock; therefore, the expected dividend yield is assumed to be zero. We do not believe there is a reasonable likelihood that there will be a material change in estimates or assumptions used to

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determine share-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in share-based compensation expense that could be material.

Results of Operations

Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021

NM - The percentage change is not meaningful.

Revenue. Total revenue was approximately $20.6 million and $16.3 million for the years ended December 31, 2022 and 2021, respectively.

Functional neurosurgery navigation and therapy revenue, which primarily consists of disposable product commercial sales related to cases utilizing the ClearPoint system, increased 13% to $9.1 million during the year ended December 31, 2022, from $8.1 million for the same period in 2021. This is primarily driven by $1.5 million of service revenue related to development services for the year ended December 31, 2022, compared to $0.4 million for the same period in 2021.

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Biologics and drug delivery revenue, which include sales of disposable products and services related to customer-sponsored pre-clinical and clinical trials utilizing our products, increased 34% to $9.1 million for the year ended December 31, 2022, from $6.8 million for the same period in 2021. This increase is attributable to a $2.0 million increase in service and license revenue and $0.3 million increase in product revenue for the year ended December 31, 2022, due to expanded commitments from our current biologics and drug delivery partners as well as an increase in new partners.

Capital equipment and software revenue, consisting of sales of ClearPoint reusable hardware and software, and of related services, increased 61% to $2.3 million for the year ended December 31, 2022, from $1.4 million for the same period in 2021. This increase is due primarily to an increase in the placements of ClearPoint capital and software.

Cost of Revenue and Gross Profit. Cost of revenue was $7.0 million, resulting in gross profit of $13.5 million and gross margin of 66%, for the year ended December 31, 2022, compared to $5.2 million, resulting in gross profit of $11.1 million and gross margin of 68% for the year ended December 31, 2021. This decrease in gross margin was due primarily to an increase in indirect labor costs in 2022 as compared to 2021, as well an increase in excess and obsolete inventory reserves.

Research and Development Costs. Research and development costs were $10.9 million for the year ended December 31, 2022, compared to $9.3 million for the same period in 2021, an increase of $1.6 million, or 17%. The increase was due primarily to increases in personnel costs, including share-based compensation expense, of $1.4 million due to growth in headcount and $0.1 million increase in regulatory fees.

Sales and Marketing Expenses. Sales and marketing expenses were $9.4 million for the year ended December 31, 2022, compared to $7.2 million for the same period in 2021, an increase of $2.1 million, or 30%. This increase was primarily due to increases in personnel costs, including share-based compensation expense, of $1.5 million resulting from increases in headcount in our clinical and marketing teams, increases in travel expense of $0.3 million, and increases in marketing activities of $0.2 million.

General and Administrative Expenses. General and administrative expenses were $9.6 million for the year ended December 31, 2022, compared to $8.0 million for the same period in 2021, an increase of $1.6 million, or 20%. This increase was due primarily to increases in personnel costs and share-based compensation of $1.5 million, IT costs of $0.3 million, insurance costs of $0.2 million, offset by a decrease in bad debt expense of $0.3 million.

Interest Expense. Net interest expense for the year ended December 31, 2022 was $0.1 million, compared with $1.0 million for the same period in 2021, due to lower interest expense as a result of the conversion of a portion of the 2020 Secured Convertible Notes in May and November 2021. Additional information with respect to the Secured Notes is in Note 7 to the consolidated financial statements included elsewhere in this Annual Report. Interest expense was partially offset by higher interest income in the year ended December 31, 2022, as a result of increasing interest rates and the Company's investment in U.S. Government debt securities.

Liquidity and Capital Resources

We have incurred net losses since our inception, which has resulted in a cumulative deficit at December 31, 2022 of approximately $150 million. In addition, our use of cash from operations amounted to $16.2 million for the year ended December 31, 2022. Since inception, we have financed our operations principally from the sale of equity securities and the issuance of notes payable.

In January 2020, we entered into the Securities Purchase Agreement (the “SPA”) with two investors under which we issued the secured convertibles notes having an aggregate principal amount of $17.5 million, resulting in proceeds, net of financing costs and a commitment fee paid to one of the purchasers, of approximately $16.8 million.

On December 29, 2020, under the terms of an Amendment to the SPA, we issued an additional secured convertible note in the principal amount of $7.5 million. As of December 31, 2022, except for a note in the principal amount of $10 million, the 2020 secured convertible notes were converted to shares of our common stock. The outstanding note is convertible to our common stock at a conversion price of $6.00, subject to adjustments as set forth in the SPA and note agreement prior to its maturity on January 29, 2025.

Additional information with respect to the 2020 Secured Notes is in Note 7 to the consolidated financial statements included elsewhere in this Annual Report.

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As discussed in Note 9 to the consolidated financial statements included elsewhere in this Annual Report, on February 23, 2021, we completed a public offering of 2,127,660 shares of our common stock. Net proceeds from the offering were approximately $46.8 million after deducting the underwriting discounts and commissions and other estimated offering expenses payable by us.

As a result of these transactions and our business operations, our cash, cash equivalents, and short-term investments totaled $37.5 million at December 31, 2022. In management’s opinion, based on our current forecasts for revenue, expense and cash flows, our existing cash and cash equivalent balances and short-term investments at December 31, 2022, are sufficient to support our operations and meet our obligations for at least the next twelve months.

We may, in the future, offer and sell additional equity or issue additional notes payable to raise funds for working capital, capital expenditures, or other general corporate purposes. Our primary uses of cash and operating expenses relate to paying employees and consultants, marketing our products, and research and development of future product offerings. Our short- and long-term liquidity requirements include the following obligations:

•We have a $10 million secured convertible note payable due in January 2025. Future interest payments associated with the note are variable based on the three (3)-month London Interbank Offered Rate (“LIBOR”) plus 2% (the reference to LIBOR will need to be replaced by June 30, 2023). At current interest rates, we expect the interest expense for the next 12 months to be around $0.7 million.

•We have lease arrangements related to our office and manufacturing facilities under non-cancellable operating leases. See Note 8 to the consolidated financial statements included elsewhere in this Annual Report.

•We typically enter into short-term agreements with vendors and suppliers of goods and services in the normal course of business through purchase orders, which are settled in cash upon delivery of such goods or services. We may also at times enter into long-term commitments or license and collaboration agreements which require commitments that are noncancellable. The total amount as of December 31, 2022 for unfulfilled purchase orders and long-term purchase commitments is $5.5 million, of which approximately 60% is expected to be paid in 2023.

Cash Flows

Cash activity for the years ended December 31, 2022 and 2021 is summarized as follows:

Net Cash Flows from Operating Activities. Net cash flows used in operating activities for the year ended December 31, 2022 were $16.2 million, an increase of $3.5 million from the year ended December 31, 2021. This increase consisted of a higher net loss of $2.0 million and the effects of net changes of operating assets and liabilities of $2.6 million, partially offset by a change in non-cash items of $1.2 million. The change in operating assets and liabilities is primarily due to the use of cash for the buildup of inventory stock in response to supply chain disruptions and the change in the non-cash items results from increases in share-based compensation.

Net Cash Flows from Investing Activities. Net cash flows used in investing activities in 2022 were $10.7 million and consisted primarily of the purchase and maturities of short-term investments and acquisition of equipment and licensing rights.

Net cash flows used in investing activities in 2021 were $0.2 million and consisted primarily of equipment acquisitions.

Net Cash Flows from Financing Activities. Net cash provided by financing activities in 2022 consisted of proceeds of $0.7 million from the exercise of common stock options and warrants and purchases made under the employee stock

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purchase plan, partially offset by payments of $0.3 million for taxes related to shares withheld in connection with vesting of restricted stock awards.

Net cash provided by financing activities in 2021 consisted of: (a) the proceeds, net offering costs, of $46.8 million received from the public offering of our common stock; (b) proceeds from the exercise of common stock options and warrants aggregating $0.5 million; and (c) issuance of common stock under the employee stock purchase plan of $0.2 million, which were partially offset by tax payments of $0.6 million related to shares withheld in connection with vesting of restricted stock awards.

Operating Capital and Capital Expenditure Requirements

To date, we have not achieved profitability. We could continue to incur net losses as we continue our efforts to expand the commercialization of our products and services and pursue additional applications for our technology platforms. Our cash balances are typically held in a variety of demand accounts with a view to liquidity and capital preservation.

Because of the numerous risks and uncertainties associated with the development and commercialization of medical devices, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to successfully commercialize our products and pursue additional applications for our technology platforms. Our future capital requirements will depend on many factors, including, but not limited to, the following:

•the ultimate duration and impact of macroeconomic trends, including the COVID-19 pandemic, inflationary pressures and supply chain disruptions;

•the timing of broader market acceptance and adoption of our products;

•the scope, rate of progress and cost of our ongoing product development activities relating to our products;

•the ability of our Partners to achieve commercial success, including their use of our products and services in their clinical trials and delivery of therapies;

•the cost and timing of expanding our sales, clinical support, marketing and distribution capabilities, and other corporate infrastructure;

•the cost and timing of establishing inventories at levels sufficient to support our sales;

•the effect of competing technological and market developments;

•the cost of pursuing additional applications of our technology platforms under current collaborative arrangements, and the terms and timing of any future collaborative, licensing or other arrangements that we may establish;

•the cost and timing of any clinical trials;

•the cost and timing of regulatory filings, clearances and approvals; and

•the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.